For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

When Vanguard created the first index mutual fund in 1976, indexing was considered a curiosity (by those who considered it at all). Critics wondered why someone would “settle” for owning the market instead of trying to outsmart it. Some proponents of active management even called indexing “un-American.”

Four decades later, the case for indexing is widely known and embraced. Tens of millions of individual investors use low-cost, broadly diversified index funds and ETFs to save for retirement, education, new homes, and secure financial futures. Meanwhile, the protests of high-cost active managers have grown more desperate. Last year, one firm published a report claiming that indexing is “worse than Marxism.”

The latest attack on indexing comes from two professors at the University of Chicago, M. Todd Henderson and Dorothy Shapiro Lund, who call index funds “risky for corporate governance.” They assert that index fund managers don’t care about governance, that they are not up to the task, and that they have too many votes. They propose that index funds should, in effect, give up their voting rights.

That proposal is careless and dangerously misinformed. So before anyone entertains the notion of systematically disenfranchising a large portion of the investing population, I’d like to share how Vanguard views our role as investment stewards.

1. We care deeply about governance. Index fund managers must care as much as—if not more than—anybody else. We essentially own stocks forever, because we can’t sell out of a stock listed on an index. So we’re indifferent, for example, about how shares of Coke performed versus Pepsi last quarter. (Our index funds have held both stocks every single day since 1976 and will continue to do so, rain or shine, so long as Pepsi and Coke are included in the relevant index.) Therefore, Vanguard’s vote and our voice on governance are the most important levers we have to protect our clients’ investments.

When we detect material risks to a company’s long-term value (such as bad leadership, poor disclosure, misaligned compensation structures, or threats to shareholder rights), we act with our voice and our vote. When companies are governed well, they’re more likely to perform better over the long term. If a rising tide of good governance lifts all boats, that’s good news for all investors.

2. We’re good at it. Vanguard’s Investment Stewardship program is vibrant and growing. Our sector analysts are deep on the issues that pose threats to the long-term value of our investments. In the past year, we’ve engaged with company boards and management teams more than 900 times (up an average of 17% per year since 2013). Every time we speak with a company chairman, CEO, or director, we’re acutely aware of the role we serve in representing the economic interests of 20 million Vanguard investors. We also listen to activists, a variety of research providers, and our own network of experts. Then we conduct our own independent analysis—and then we vote.

In some cases, boards and management teams have, for too long, taken the support of their index fund shareholders for granted. The reality is that when an activist’s case for change and their board nominees are strong, we’re more than willing to support them, as we did in about half of the proxy fights over the past year. Even where the case falls short, activists often catalyze a discussion that generates meaningful change over time.

3. One share of stock should always equal one vote. And one million shares should equal one million votes. This is a fundamental governance right that should transcend geography, investment style, and holding period. Large funds with many investors have greater voting power than small funds with fewer investors. Vanguard doesn’t control corporate voting outcomes any more than the State of California controls national elections; we have our proportionate say based on how many shares we own, and we vote our shares based on the best long-term economic interests of our clients. Only when a majority of other shareholders reach the same conclusion does the outcome align with our vote.

Any proposal to concentrate voting power in the hands of active managers threatens to reduce board and management accountability, promote short-termism by silencing the longest-term voices, and distort the incentives for investors and companies. Index funds may be passive investors, but the Vanguard funds are not passive owners. Our clients trust us to represent their interests in boardrooms across the globe. We act on that responsibility with the seriousness and dedication it deserves.

Bill McNabb

Bill McNabb is chairman and chief executive officer of Vanguard. Bill joined Vanguard in 1986, became chief executive officer in 2008, and then chairman of the board of directors and the board of trustees in 2009. Previously, he led each of Vanguard’s client-facing business divisions, most recently serving as managing director of Vanguard’s institutional and international businesses. Bill is active in the investment management industry, and serves on the executive committee of the Investment Company Institute’s Board of Governors. He also serves on the boards of the Zoological Society of Philadelphia and the United Way of Greater Philadelphia and Southern New Jersey. Bill earned an A.B. at Dartmouth College and an M.B.A. at The Wharton School of the University of Pennsylvania.

Comments

Carlton S. | July 8, 2017 2:39 pm

I own Vanguard index funds and certainly have no complaints about the expenses. (They are so low that the advantage of owning equivalent funds by other companies having slightly lower expenses is trivial.)

However, if Vanguard wants to play an active role in the governance of hundreds — if not thousands — of companies whose stocks it owns, wouldn’t that require a research effort equivalent to that performed by the managers of actively managed funds, with associated substantial costs? Or is Vanguard now so large that its economies of scale allow it to do this research without substantially raising the cost to individual investors?

Hi Carlton. Vanguard is very mindful of operating expenses, but we consider our governance activities to be an essential responsibility and obligation. It’s not our role or intention to micromanage the thousands of companies in which we invest. Rather, we believe that if the proper governance frameworks are in place—beginning with a company’s board of directors—investors will benefit in the long run.

We’ll continue to be involved in investment stewardship, which we don’t believe will substantially raise costs for our investors. We believe that companies that are governed well will perform better over the long term. Thanks for your comment.

David P. | July 7, 2017 2:48 pm

I believe “activist shareholders” could be trying to do any of several things:
Trying to make a quick buy and sell buck “Corporate Raiders”?
Trying to “save the planet” (possibly at the expense or detriment of the business)
or trying to maximize long term viability and profitability of the business
Could there ever be a potential conflict between employees of the business and the shareholders?

Wendell H. | July 7, 2017 7:54 am

Disenfranchised shareholders because they own index funds does not meet equity for everyone. Active managers have not proven they are superior in their thinking in the long term. The academics are not able to support their thesis with valid data. Vanguard needs to continue to use its protocols to decide how to vote.

Deborah R. | July 6, 2017 10:13 pm

More power to you! I am very pleased as a passive investor who has neither the time nor the knowledge to evaluate corporate governance to have Vanguard Funds actively monitoring and engaging with corporate boards and management on my behalf. The two University of Chicago professors referenced in this blog entry appear to be suffering from a severe case of Ivory Toweritis (lack of knowledge about real events and real consequences in the world outside academia). An individual’s or team’s qualifications to evaluate corporate governance is based on that individual’s or team’s ethics, education, experience, intelligence and powers of judgment, not what type of fund the individual or team manages.

Don L. | July 6, 2017 8:46 pm

I wonder what Vanguard’s voting policy is with regard to separating the CEO position and the Chairman of the Board position? I’m a strong believer that it’s good corporate governance and helps maintain a strong, independent Board to have a non-management Chairman representing the shareholders’ interests, and I vote accordingly in my individual stock proxies.

With regard to the principle of one share-one vote, and using Mr. McNabb’s example of Coca Cola and Pepsi, what if, say, Pepsi initiated supervoting shares (see Comcast A and B shares which have existed for decades) while Coca Cola retained one share-one vote? How much leverage would an index investor like Vanguard have against Pepsi compared to an “activist” investor? Activist investors with strong positions can (potentially) sell their positions, or add to them, according to changes in corporate governance that may be prompted by their advocacy. My judgement is that permanent ownership provides you with a vote every year, but an activist investor who may sell out his entire position or substantially increase it, and thus may have a major impact on value, will have more leverage.

Hi Don. Thanks for your comment. Vanguard believes in the importance of strong, independent board leadership. Board leadership can take the form of an independent chairman or a lead independent director whose role is clearly articulated. We also advocate for majority-independent boards whose key committees (compensation, nominating, and audit) are composed entirely of independent directors.

Regarding your second question: While active (or activist) managers may threaten to sell, divestment ultimately results in investors giving up their stake—and consequently, their voice—in the long-term future of a company. We believe that having a voice, both through constructive engagement and our votes, will encourage strong governance practices that can result in better long-term value for shareholders.

Jack T. | July 6, 2017 5:16 pm

Index funds are “passively” managed in that they do select individual securities that are expected to outperform. But indexes whose performance index funds attempt to track are not passively created. Membership in the index, methods for weighting, etc. are decided by index creators. Index creators are becoming more “active” in deciding criteria for which securities to include, for example “responsible” investing. Index fund managers cannot decide to sell a stock because of specific shareholder issues, as an active manager can. So, voting in the interest of shareholders is something index managers must especially do. It is not and active vs. passive issue as Mr. McNabb pointed out.
Does Vanguard have a list of key shareholder principles to provide guidance on how it votes on specific items requiring shareholder voting?

You may also be interested to know that we’re a founding signatory of the corporate framework published earlier this year by the Investor Stewardship Group. The framework details both governance expectations for companies and stewardship expectations for institutional investors. https://www.isgframework.org/corporate-governance-principles/

Bill C. | July 6, 2017 4:23 pm

Joe S. | July 6, 2017 4:13 pm

Dear Mr. McNabb: Every time I hear of an activist shareholder calling for change at a company I’m always skeptical. Do these activists have the best interest of the company they are seeking to affect or are they trying to buy a bigger house in the Hamptons? Vanguard acts as a counterbalance to these activists who may have ulterior motives with its voting power. Vanguard puts the interest of its clients first, and that’s comforting to know as a small investor like myself. Regards, Joe S. – Vanguard client

J.Ted S. | July 6, 2017 3:16 pm

I agree totally. When an organization disrupts the Status Quo, the first attack is to discredit it and when that does not work then the next step is to try and over-regulate it through legislation and lobbying. Look at Uber history with NY City and when unions were effected!! Look at the Left’s response to Trump, discredit and try to legislate out!!! Disrupters create new visions and opportunity for good change in the future.

Thanks for the informative post, Bill. As a long time Vanguard client, I’m very happy to hear that Vanguard takes its stewardship roll seriously, acting as the good corporate citizen on my behalf.

What about taking the involvement one step further: getting a seat on the board of directors of the companies in which Vanguard is invested? It obviously wouldn’t be possible (or necessary) to do that for all of the companies in which Vanguard is invested (since those number in the 1000s), but a board seat wields more power than shareholder votes and would be a louder voice when speaking for the long-term economic interests of the company and Vanguard’s clients.

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For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.